More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
One day after Allen Stanford was convicted on March 6 of operating a $7 billion Ponzi scheme, the CEO of the Securities Investor Protection Corp. (SIPC) told lawmakers that SIPC is not responsible for reimbursing Stanford investors for their losses.
At the urging of lawmakers, the Securities and Exchange Commission is suing SIPC to regain funds for Stanford victims.
But SIPC’s president and CEO Stephen Harbeck, (above), told members of the House Financial Services Capital Markets Subcommittee that “SIPC protects the ‘custody’ function that brokerage firms perform.” This means, he said, that “customers are protected against the loss of the cash and securities held for them by their broker-dealer” when the BD fails. Stanford victims, however, “knowingly sent their money away from the brokerage” and bought certificates of deposit (CDs) issued by a bank in Antigua, he said.
“Let me be very clear: In the 40 year history of the Securities Investor Protection Act (SIPA), SIPC has never been interpreted to permit SIPC to refund the purchase price of a bad investment,” Harbeck said.
Stanford was found guilty on 13 counts of a 14-count criminal indictment, including fraud, conspiracy and obstructing an investigation by the SEC. He was found not guilty on one count of wire fraud. The charges carry a possible prison sentence of nearly 20 years.
In late February, Rep. Scott Garrett, R-N.J., chairman of the subcommittee, introduced a bill, H.R. 757, the Equitable Treatment of Investors Act, that would expand SIPC payout to fraud victims. Two other such bills have been introduced as well. Harbeck said SIPC supports none of the bills.
Garrett said at the March 7 hearing that H.R. 757 “would reaffirm and clarify key protections for ordinary investors that were put in place when Congress passed and amended SIPA.” In particular, he said, “the bill aims to shield innocent individual investors who have already been defrauded and financially devastated by Bernie Madoff from further clawbacks by the SIPC trustee.”
In addition, Garrett said that the bill clarifies that for purposes of SIPC protection, “customers of registered brokers are legally entitled to rely on their brokerage statements as evidence of what their broker owes them. Indeed, in a world where customers do not hold physical stock certificates, it could not be any other way.”
H.R. 757, Garrett said, would also “end an ongoing conflict of interest by having the SEC, rather than SIPC, select trustees for SIPC liquidations.”
Garrett said several of his colleagues have already joined him in cosponsoring the bill.
Garrett’s hearing also looked at the 68-page report issued in February by the SIPC Modernization Task Force outlining legislative recommendations and other changes related to SIPC.
The recommendations in the report, which will now be considered by SIPC’s board, are as follows:
- Increase the maximum level of customer protection to $1.3 million; index the level of protection to inflation.
- Eliminate the distinction in the levels of protection for cash and securities.
- Protect participants in pension funds on a pass-through basis.
- Amend the minimum assessment to the greater of $1,000, or the amount set by SIPC bylaw not to exceed 0.02% of the member’s gross revenues from the securities business.
- Allow for the use of the direct payment procedure in cases in which the total amount of claims aggregates less than $5 million.
- Require auditors of SIPC members to file copies of audit reports with SIPC.
- Affirm the obligation of banks and other custodians to safeguard Rule 15c3-3 accounts and to reaffirm that such accounts are subject to trustee control upon broker-dealer liquidation.
- Continue to vest the SIPA trustee with the same avoidance powers as a trustee in a case under the bankruptcy code.
- Continue to treat claims arising from repurchase and reverse repurchase agreements as general creditor claims.
- Continue to treat claims arising from open TBA contracts as general creditor claims.
- Continue to treat claims arising from credits received pursuant to soft dollar arrangements as general creditor claims.
- 12. Continue to treat claims for fees earned in connection with underwriting or other transactions effected by a syndicate as general creditor claims.
- Study discrepancies between SEC Rule 15c3-3 and “customer property” under SIPA.
- International relations: SIPC is to assist in the creation of an international association.
- SIPC will continue investor education efforts.